Putnam's top clients may pull out

Pension funds consider fleeing troubled fund firm

SAN FRANCISCO (CBS.MW) -- A day after it became the first mutual fund company charged with securities fraud in the growing industry scandal, Putnam Investments faced the wrath of its large institutional clients.

Both the Massachusetts pension fund, with $1.7 billion at Putnam, and California's giant CalPERS fund, with $1.2 billion at the firm, said Wednesday that their boards would decide whether to pull that money from the Boston fund giant.

Massachusetts Treasurer Timothy Cahill will recommend moving pension investments out of Putnam when the fund's board meets in a special session on Thursday, his spokeswoman said.

Cahill made his decision after meeting with Putnam executives on Wednesday, said spokeswoman Karen Sharma.

"Putnam manages a lot of money for the Commonwealth," she said. "The treasurer wants to make sure that money is in good hands. He's really uncomfortable with what's going on at Putnam, and that's why he's making this recommendation."

The Massachusetts account represents less than 1 percent of Putnam's $272 billion under management, but losing an influential investor from its home state could hurt Putnam's standing with other institutional clients.

"Any loss right now, no matter where it's coming from, can't look good," said Geoff Bobroff, an industry consultant. "There is a herd mentality, and people are inclined to follow each other."

The $29 billion Massachusetts pension fund has $1 billion invested in Putnam's international stock funds and another $742 million in its small-capitalization U.S. stock funds.

At Putnam, a unit of insurer Marsh & McLennan Companies
MMC, +2.04%
a spokeswoman had no comment on the reaction it was receiving from institutional clients.

A trustee for the Massachusetts retirement fund said he also wasn't inclined to keep the plan's international assets with Putnam.

"If I were voting today, I would vote to drop them" from international equity management, said Ralph White, one of nine board members and a representative of the plan's investment committee. Putnam already was on the board's watch list for delivering poor investment results, he added.

On Tuesday, the Securities and Exchange Commission and Massachusetts regulators brought civil charges against the fifth-largest U.S. fund company for failing to prevent six former fund managers from improperly trading in Putnam's international funds. Two of the managers were also charged individually in the complaints.

"This was supposed to have been cleaned up three years ago," White said. "They failed to live by the ethics they said they would."

One of the managers named in the complaints, Omid Kamshad, Putnam's former head of international equities, handled the international portion of the Massachusetts account, White said.

The Vermont State Teachers' Retirement System met Wednesday to consider its Putnam fund holdings, while the $150 billion California Public Employees' Retirement System, or CalPERS, plans to review its relationship with Putnam at a board meeting on Nov. 17, spokeswoman Patricia Macht said.

Putnam manages about $1.2 billion for CalPERS, the nation's largest public pension fund, divided evenly between international investments and U.S. growth stocks. CalPERS Chief Investment Officer Mark Anson is scheduled to meet with Putnam officials next week, Macht said.

"What we are concerned about is the type of internal controls that Putnam may have or may not have," she explained. "The only reason the world knows about this is because Massachusetts officials pursued an investigation and it became public. These are all issues that our chief investment officer will be asking of Putnam."

Putnam handles roughly 2,000 retirement plans with more than 1.8 million participants, according to the company. Such institutional business has been driving growth in the firm's assets under management, a key measure of profitability.

Institutional assets of $101 billion at Sept. 30 were 31 percent higher than a year earlier, according to Marsh & McLennan's latest quarterly report. By comparison, retail fund assets rose just 6 percent to $171 billion.

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